Smart Climate Models and Dumb Economic Models – Why Lomborg is Wrong

Bjorn Lomborg, author of The Skeptical Environmentalist and subject of recent documentary Cool It, advocates a slow and steady response to climate change. While admitting it’s a “bit of a problem”, he argues climate change is not the singularly dangerous threat to our growth, or even existence, as David Suzuki or Al Gore would have it. Spending big money to slow emissions of greenhouse gases is a bad investment. And he’s got the facts and figures to prove it.

But Lomborg is wrong. His claims are based on a flawed economic model that excludes most of the science that tells us catastrophic climate change is a possibility. Having ignored the danger from the outset, it comes as no surprise that Lomborg is not concerned.

Lomborg draws from the classical cost-benefit economic model developed by Yale economist William Nordhaus, the Dynamic Integrated model of Climate and the Economy (DICE). DICE calculates the costs of climate change policy by summing the net costs of implementing a given policy response and the damage caused by the warming associated with that response. It balances these costs with the economic benefits of avoided environmental damage, and uses a standard discount rate to yield a net present value. Out pops the optimum rate of both investment and warming. It treats the climate system like a very simple oven, the temperature controlled by policy and technology.

The net result? Slow and steady is the way to go. The optimum path is to the earth warm exactly 2.6 degrees C by the end of the century. Start with a bit of money for R&D, but save the heavy lifting until we find that magic bullet that makes fossil fuels obsolete. A comforting result.

The flaw in DICE is simple. It excludes most of the complex, non-linear behaviour of the climate system that has climate scientists really worried. Here are just three of those behaviours.

We now know that sudden, catastrophic changes in climate are a real possibility.These low-probability, but highly consequential events include the breakdown of ocean circulation patterns and the melting of ice-caps. The precise timing of these ‘tipping points’ and their effects cannot be treated with certainty. DICE ignores the possibility of these nasty surprises.

The climate system also has a lot of positive feedback, whereby greenhouse gases cause warming which releases more greenhouse gases, and so on. Warming oceans may start to release the carbon they had previously been absorbing. A melting north may belch huge amounts of methane, a potent greenhouse gas. If these triggers go off, we may have to watch helplessly as the climate shifts all by itself into another, very hostile, equilibrium. An aggressive early response is very important if we are to avoid these triggers. What we do later matters much less. In technical terms, the climate is path-dependent. DICE ignores path-dependency.

Variability in extreme weather events, like super-hurricanes, is not well understood. There has not been enough history of warming to generate empirical evidence. But we do understand the underlying theory of these extreme events well enough to have confidence there is significantly increased risk. DICE ignores that risk.
These criticisms of DICE are not controversial. Nordhaus himself acknowledges DICE does not entertain the possibility of low-probability, highly catastrophic events and admits the pace and extent of warming is highly uncertain beyond the next couple of decades. Our knowledge of climate damages is, according to Nordhaus, ‘very meager’.

Yet the DICE model continues to inform debate on policy choice. Lomborg, among others, urges governments not to spend much in the near term on climate change, with the exception of a bit of R&D.

There is another view. The Stern Review on the Economics of Climate Change, commissioned by the UK Treasury and released in 2006, includes the possibility of catastrophic climate change and estimates its damage as a loss to global GDP of upwards of twenty percent annually. Put more plainly, that is a collapse of our industrial economy. The costs of early and aggressive cuts in emissions are treated as a kind of insurance policy against this collapse. Paying to reduce the odds of catastrophe is common sense, like insuring our houses against fire.

To emphasize: early and aggressive cuts in carbon matter much more than cuts later this century.

Ignoring uncertainty does not make it go away. We’ve seen this before. Japan recently learned the hard way what happens when you ignore the possibility of low-probability but catastrophic events. The financial crisis hit so hard in 2009 partly because the economic models didn’t include the possibility of house prices dropping everywhere all at once. Japan will recover, and the Fed came to the rescue of the financial system. There will be no such rescue if the climate hits one of these tipping points. Let’s buy the insurance.